Stock Investing: Legal Restrictions for Congress

By Paul Mladjenovic

The latest sensation in the world of insider trading has been how congresspeople of both parties have reaped fortunes by doing something that’s illegal — but was legal for them! For those folks who’ve wondered how someone can spend millions to get a “public service” job and then retire a multimillionaire, now you have a clue: congressional insider trading.

Congressmen and women, as you know, pass laws for a variety of matters. They know which companies stand to lose or benefit as a result. They can then invest in the winners and/or avoid (or go short) the losers. (When you go short on a stock, you make money by selling high and then buying low.) Many were able to easily reap million-dollar gains because of this privileged perch they stood on.

Some folks in Congress made outrageous profits from shorting strategies during the 2008 crash when they learned of pending financial developments behind closed doors before the public (and most investors) found out. It’s maddening that these politicians profited (legally!) from activities that anyone else would have ended up in jail for doing.

From the furor in late 2011 over this incredible corruption came a new law passed in early 2012: the Stop Trading on Congressional Knowledge (STOCK) Act. Hopefully it will do the trick, but the real lesson for stock investors (and voters) is that investors must always be vigilant about what insiders (both corporate and political) are doing. The act is officially called H.R. 1148, and you can look it up at places such as OpenCongress.org and find other sources through your favorite search engine.